Caution Urged For NJ Builders

The real estate market appears to be cooling from the peak levels of 2004 and 2005, as cautious buyers are less willing to bid up prices. Vacant land is disappearing. And New Jersey’s environmental regulations make it difficult to build on what land is available.

Builders are responding by finding ways to boost both new home supplies and demand. Some developers are focusing on housing for senior citizens, many of whom might otherwise retire outside the state. And builders are redeveloping former industrial zones in urban areas.

Still, developers should prepare for the possibility of a market pullback, said Patrick O’Keefe, CEO for the New Jersey Builders Association

“Builders are advised … to manage their levels of activity with an eye toward the future, rather than assume the trends of the past,” O’Keefe said.

“In Europe, it’s more like 50%. Here, people think they’re pressed if its 20%,” Zell said. And if buyers get strapped, they’ll cut down on discretionary spending before they stop paying their mortgage. “We’re still the cheapest housing in the world,” he said.

While there are still some markets with relatively unfettered opportunity to build new homes, many cities and states are increasing zoning restrictions and other artificial barriers to construction. “The whole country is going the route of California,” he said.

Sternlicht took BEAR argument:

There are so many funds chasing the real estate game — oil sheiks, Hong Kong billionaires, hedge funds. This is a totally different market than even a year before.”

Sterlicht said real estate prices have risen so high that returns have fallen to unacceptable levels.

“HOT POTATO MARKET.” One hotel he looked at recently in Aruba produced $14.7 million in cash flow but the owner needed $265 million to pay off his debt on the property. At that price, the investment would produce a return of just 5.5%. “I would pay $100 million less for it,” Sternlicht said.

The situation has all the hallmarks of the Internet bubble, Sternlicht said. “It feels like a hot potato market,” he said. “I have to think, ‘Who’s the bigger fool I’m going to sell it to?'”

“Several talks focus on age-restricted housing, which is typically limited to people who are at least 50 years old. Half of all housing built in New Jersey last year was age-restricted, O’Keefe said.

Builders are not just drawn to such projects because of demand. It’s often easier to get approvals for these subdivisions because municipal leaders welcome new taxpayers who don’t have schoolchildren.”

The U.S. economy expanded in the first quarter at an annual pace of 4.8 percent, the fastest in more than two years, led by resurgent consumer spending and a rebound in business investment that gave the economy momentum going into the second quarter, a government report showed.
…
Consumer spending, which accounts for about 70 percent of the economy, rose 5.5 percent at an annual rate last quarter, the fastest since the third quarter of 2003, compared with a 0.9 percent pace in the previous three months. The first-quarter rate compares with an average of about 3.3 percent over the last 20 years.
…
Business fixed investment, which includes spending on commercial construction as well as equipment and software, rose at a 14.3 percent annual rate in the first quarter, after rising at a 4.5 percent rate. Spending on new equipment and software rose 16.4 percent, the most since the first quarter of 2000, after a 5 percent rate in the fourth quarter.
…
The government’s personal consumption expenditures index, a measure of prices tied to consumer spending, rose 2.0 percent after a 2.9 percent rise in the fourth quarter. The index excluding food and energy, a measure favored by Fed policy makers, rose at a 2.0 percent annual rate after a 2.4 percent rise the previous quarter.

The GDP price index, a measure of prices tied to the report rose at a 3.3 percent annual rate in the first quarter, following a 3.5 percent fourth-quarter gain.

I have argued in past that Supply side restrictions do play role in Housing prices. I do agree with lot of other factors such as interest rates are also responsible, but those factors are same in whole country.

When you look at why NJ price rise is so much higher then PA, it is easy to see that Supply in NJ is not able to keep up with demand. In PA, where supply can increase when demand increases, the price increases in current boom is not as high as NJ. So, in my opinion, if NJ creates new Jobs, they should also build equivalent number of housing. And, bear in mind that percentage of people living in NJ & working in NY has been going down in last decade. In last decade, more and more folks who live in NJ also work in NJ.

There was a formula created for Affordable housing, but in last few years loopholes have been put into that as well. For e.g. The plan also allows for up to 50 percent of a municipality’s obligation to be fulﬁlled through the development of senior housing, and another 50 percent to be transferred to other municipalities in the same housing region or a statewide affordable housing bank.

I do feel that we are hoping at present that prices will come down significantly, so many of us can afford a house. I feel though this may be true by 10% to 20%, but that still will not make housing affordable for most of us. I think we need political lobbying campaign to make housing more affordable for young families.

In the article, that’s a fairly stupid statement. It’s more like they are building before things get worse on the land the already own.

I also agree on the age-restricted housing. For most towns, it’s perfect. You get taxes, but no kids in the schools. The people don’t drive, and don’t cause trouble. Also, have you seen the prices in some of the places? And I am talking about south Jersey. Unbelievable.

Though age-restricted housing is not without its faults. As noted in this blog weeks ago, it was found that use of age restricted housing may actually increase the number of children in a community b/c the people buying the new housing are from the same community, thus freeing up their homes for more families

“I also agree on the age-restricted housing. For most towns, it’s perfect. You get taxes, but no kids in the schools. The people don’t drive, and don’t cause trouble. ”

First of all these developments are mostly for empty nesters who don’t want to cut grass or shovel snow anymore. Second, they do drive. While a typical household will generate 10.2 trips per household per day and condos only around 6/day. Age restricted communities generate 5.6 according to Stephen Corcoran in his paper published at the ITE (Institute for Transportation Engineers). The Traffic reports for these places will often be submitted as “retirement community” which has tripgens of 2.8/day. The seventh edition of the ITE trip gen manual has an Age Restricted category but it has only 3 places that it studied, one in AZ, one in FL and one in NJ. FL and AZ are likely retirement communities and I think the NJ example is in Ocean or Atlantic County and thus do not accurately depict these type of developments.

I have extensively researched this topic and have found that the terms age restricted and retirement seem to get confused. I have also found out that in Monmouth County that they treat these things as being even worse than a regular house because they have experienced boomerang kids in alot of these developments who go to college and have jobs and go out at night.

CNS – If young families with children were required to pay a per-child fee for every kid that attends public school, that would take away some of the distortion of real estate taxes that is causing much of this misalignment (towns focusing on senior housing only etc etc).

I personally like the idea. I am not sure if there are any constitutional issues. The problem I have is there is really no organization or grass root group raising the issues faced by young families. You have some folks lobbying for affordable housing at the very bottom ladder, and most of us won’t qualify for that. But for large number of middle class young families, no one is really lobbying.

Personally, I think if all young families of NJ combine their forces, you have about 10%+ voting population, that should be able to tip the election results. If they are organized, at the least they can bring debate back to table in Trenton.

Just a side note: In NJ, COAH mandates that for every 30 new jobs created, the municipality shall provide one unit of affordable housing. Now tell me where the remaining 29 folks who got job in NJ will live??? My point is, if you allow jobs, then allow houses as well, or else don’t allow anything.

“There was a formula created for Affordable housing, but in last few years loopholes have been put into that as well. For e.g. The plan also allows for up to 50 percent of a municipality’s obligation to be fulﬁlled through the development of senior housing, and another 50 percent to be transferred to other municipalities in the same housing region or a statewide affordable housing bank.”

I beg to differ. The third round is based on a municipalities development patterns from 2004 to 2015. It states for every 8 units of market rate housing 1 unit of affordable must be made. Also the allocation of units goes like this 25 % Apartments, 25% senior the rest are regular affordable units. I have written acouple of these plans so I have some expertise. BTW square footage of commercial and industrial are factored in as well.

I think it is fair. But all of these age restricted units being built will incur obligations.

Of the other half, I would say 25-30% high end condo’s, 15-20% spec. & non-spec. luxury homes, and less than 1% middle of the road SFH’s which someone probably built themselves on a piece of land they owned prior to the boom.

I’m against using legislature to restrict the rights of property owners and I’m against using legislature to try to control the marketplace.

Builders are building big McMansions on tiny lots and “luxury” condos because buyers are buying them, it’s that simple.

Why on earth would a builder build a “middle of the road” home? The variable costs of the structure itself are minimal compared to the base fixed costs. It really doesn’t cost much more for the builder to “go big”. As long as you can sell for top dollar, the bigger you go, the higher the ROI.

Builders are going to build as big as zoning permits, and when zoning doesn’t permit, they are going to try like hell to get the variances to let them go big.

Exactly, a developer is going to look to maximize return on investment. Labor expenses as well as land are comparbale to a modest sized home. There is no incentive to go modest sized. Builders I know, will tell you that and with the regulatory hurdles to subdivide a property it only worth their time to go big.

Grim – I agree with your comments about not having legislation interfere with Market forces. And I also agree that Government should not take away people’s property. I also don’t want to take the Zoning right given to local towns.

But, I think that is not the end of the solutions. I feel the main issue is Fiscal imbalance that gets created by addition of houses with Kids. Even if Town wants to allow Single Family home development, there is disincentive to do so, as the cost of providing service to family with Kids is higher then money the town receives. In my opinion, if State can provide some better way to finance education costs, at least this disincentive will reduce.

After that Towns will not have at least financial disincentive. There still could be other factors such as local population not wanting new development, and that can still remain intact. I am not saying all Towns will allow more SFH to come, but few at least may allow. At least Town can not claim that they are at Financial disadvantage by creating SFH.

Also, in today’s report only you indicated the Prices are not going to Fall. If that is the case, many young folks will be in more difficult situation. As the price will remain flat, but interest rates will go up.

chicagofinance: I did not recommend subsidy. I recommended, State to provide some better way to finance education cost.

I agree with you that bureaucrasy & costs are too high. The better way could be to reduce costs.

The issue is in NJ political climate, no-one really talks about interests of young family. You can see, All the discussion for reduction of Property Tax, but none for how difficult it has become for Young families to afford a house.

I don’t think, I can suggest a solution. But at least we need someone to acknowledge at the least that there is problem. Then one can look at solutions.

I did not say that young families with kids are a problem. I think all kids are wonderful. I am only trying to nudge the property tax issue so that it is a fairer-pay-as-you-use kind of a system.

In full disclosure – I do not have any kids (and hence am probably biased). However, I pay a full share of the property taxes. When times are tough, as they are for me now, I do wish it was slightly different.

You guys are complaing because it is a regressive tax in most cases. Because NJ has fiefdoms called municipalities, you get redundancies of services, add to it the NJEA’s stranglehold on the Dems in this state and you end up with school teachers salaries approaching 6 figures for 9 months of work w/ a pension and free graduate education. That is where the fat is at.

Make education funding a state responsibility with a state tax paying for education and you would not have the same anti-children mentality.

As far as private vs. public, generally you would think that private would be better, but they need to make a profit which would add a premium. I was at a transportation conference three weeks ago and the selling of toll roads was brought up. Apparently, where they have been sold in the US, tolls have all gone up while maintenance has gone down. So your be the judge.

this guy corzine would never have enough balls to take on the
njea,,, are you kidding look at some of his appointments so far.
you could start with the AG.
this state is gone, and you aint
seen nothing yet. wait till he folds on the Sharp James money grab.

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